Introduction

1.1	Each year, we conduct two types of audits; financial audits to 
express an opinion about the fairness of financial statements, and 
value-for-money audits, to comment on the economy, efficiency and 
effectiveness of government programs. During the past year we have 
examined many parts of government and its programs.

1.2	This volume of our 2006 Report includes only our financial 
audit related work. It reports on our audit of the Province’s financial 
statements, our financial audits of other government organizations, 
and provides comments about the Province’s financial condition. It 
also provides information about the operations of the Office of the 
Auditor General. 

1.3	The results of our value-for-money audits will be reported 
once the Legislature resumes and a Public Accounts Committee and 
a Crown Corporations Committee have been appointed. We expect to 
include chapters about:

•	the tracking system for wood harvested from private woodlots;

•	Community Economic Development Agencies;

•	the Health Levy;

•	New Brunswick Credit Union Deposit Insurance Corporation;

•	the NB 9-1-1 system;

•	New Brunswick Investment Management Corporation;

•	the Office of the Superintendent of Pensions; and

•	the role of the Auditor General.

The Province’s 
financial statements

1.4	Our audit report on the Province’s financial statements is 
included in Volume 1 of the Province’s Public Accounts. 
Mr. K.D. Robinson, C.A., Deputy Auditor General for the Province 
of New Brunswick, signed the audit opinion. The opinion is dated 28 
July 2006.

1.5	The audit opinion says that the Province’s “…financial 
statements present fairly, in all material respects, the financial 
position of the Province as at 31 March 2006 and the results of its 
operations, the changes in its net debt and its cash flows for the year 
then ended in accordance with Canadian generally accepted 
accounting principles.”

1.6	This is an unqualified opinion. We have issued unqualified 
opinions in each of the past eight years. 

1.7	Mr. Robinson was responsible for the audit, and, therefore, he 
issued the audit opinion. I was not involved with the audit of the 
Province’s financial statements since I had served as the Province’s 
Comptroller for part of the fiscal year being audited. The rules of 
professional conduct for Chartered Accountants required that I not 
take part in or influence the audit.

1.8	We were pleased with the timeliness of the Province’s 
financial statements for the year ended 31 March 2006. The Province 
issued the statements on 16 August 2006, a three month improvement 
over the previous year. Timely financial statements means the 
information is available to users of those financial statements while it 
is relevant and useful.

1.9	Even though our audit opinion was unqualified, we were 
concerned by some items that arose during our audit. These did not 
result in significant accounting misstatements, and therefore we were 
able to issue an unqualified opinion. We discuss these issues in 
Chapter 2 of this volume. 

1.10	I want to highlight one item that caused us concern. At the 
end of the fiscal year, the government paid an extra $60 million to the 
universities. The authority for this was obtained by special warrant. 
However, this $60 million was not additional funding to the 
universities, as it was offset by a reduction in the budgeted funding 
they will receive in the 2006-2007 fiscal year. This is obvious from 
looking at the 2006-2007 Main Estimates, and actual funding for 
previous years:



1.11	The $74 million increase in funding in 2006 followed by the 
$111 million decrease in funding in 2007 shows that the extra 
$60 million payment was an accelerated payment of what normally 
would be a 2007 expense. If the payments had been made normally, 
they would have looked something like:



1.12	 The $60 million payment was properly accounted for. It was 
authorized and paid during the year ended 31 March 2006 and the 
Province could not get it back, so it was a legitimate expense of that 
year. We were satisfied with the accounting for the payment.

1.13	My concern is that the expense may have been incurred with 
an eye to the 2007 budget, rather than for prudent fiscal management 
purposes. Had this expense been incurred in the normal fashion, the 
surplus for the year ended 31 March 2006 would have been $303.6 
million rather than $243.6 million, and the budgeted forecast for the 
2006-2007 fiscal year, assuming no other changes, would have been a 
deficit of $38 million rather than a surplus of $22 million. 

1.14	But, of course, in 2007-2008 we would expect the funding to 
return to its normal level of approximately $210 million. The 
accelerated payment allowed a budgeted surplus for 2006-2007, but 
it did not make a structural change to the Province’s expenses; it 
simply pushed an expense back one year.

1.15	This transaction has made it difficult to understand the fiscal 
challenges the Province must face in the future. It simply added 
confusion to any assessment of the Province’s fiscal situation. In fact, 
while the 2006-2007 Main Estimates showed that funding for 
universities was dropping from $259 million to $148 million, the 
budget speech was highlighting the increased funding the 
government has provided to universities:

We are increasing funding to universities and we will meet 
our commitment of a 13 per cent increase over this mandate 
by 2007-2008. This will mean by 2007-2008, annual funding 
to universities will have increased by over 34 per cent, or 
$54.7 million, since we first came to office in 1999.

1.16	While this statement in the budget speech was correct, there 
was no mention of how the accounting for the funding was being 
used to affect the surplus for the 2005-2006 fiscal year, or its 
potential impact on the budgeted surplus for 2006-2007.

1.17	By moving regular operating grants in and out of fiscal years, 
the government makes it difficult for readers of the financial 
statements to assess the government’s fiscal management.

1.18	I recognize that there is now a new government in place in the 
Province. Nevertheless, I wanted to highlight the importance of the 
government being clear and transparent in its budgeting and in 
reporting its results. We will continue to highlight these types of 
transactions in the future should they occur.

Comments on the 
Province’s financial 
condition

1.19	Chapter 3 contains our comments on the Province’s financial 
condition. As in past years we present multi-year indicators for 
sustainability, flexibility and vulnerability. Our analysis shows 
positive trends in all three of these areas.

1.20	This year we have added some comments about individual 
components of the Province’s financial statements. In this analysis 
we identify:

•	there is room for the Province to improve its collection of loans 
and receivables;

•	the Province’s liability for injured workers is growing at a 
significant rate; and

•	in two of the past four years, the percentage growth in 
expenditures has exceeded the percentage growth in both GDP 
and revenue.

1.21	We also provide multi-year trends for the components of the 
Province’s Statement of Financial Position and its Statement of 
Operations as well as items reported in the notes to the financial 
statements.

Reducing the other 
audits we do

1.22	Our audit of the Province’s financial statements is not the 
only financial audit we do. We also audit the financial statements of 
various other government corporations, agencies and boards. These 
are identified in Chapter 2. For most of these organizations, 
legislation directs us to perform an audit. 

1.23	Auditing these organizations consumes a significant portion 
of our resources. In the future they may consume even more 
resources. New assurance standards issued by the Canadian Institute 
of Chartered Accountants will require us, in common with all other 
chartered accounting firms, to do more work and to document aspects 
of our work more thoroughly. This is true for all of our audits, 
including the audit of the Province’s financial statements. We expect 
that this will increase our financial audit time by 20% to 30%. This 
will seriously affect the number of value-for-money audits that we 
are able to conduct.

1.24	One way to offset the increased audit effort would be to 
reduce the number of organizations audited. Some of the 
organizations that we audit are small, and the government has access 
to the information it needs to hold them accountable even without an 
audit. We would like to have the opportunity to discuss this with 
government, and to have government remove the legal requirement 
for us to audit certain organizations. We also intend to stop auditing 
any organizations that we are not required by law to audit.

Importance of net 
debt

1.25	In the Introductory Comments to Volume 2 of the 2005 
Report of the Auditor General, I commented on the Province’s 
adoption of tangible capital asset accounting. In those comments I 
stated that:

Readers of the Province’s financial statements will need to 
become familiar with this new method of reporting. Under 
the old method, the results for the year could be summarized 
in one number, the increase or decrease in net debt for the 
year. Under the new model, there are two summary 
indicators of the results for the year. The increase or 
decrease in net debt is still reported, but it is no longer the 
bottom line on the Province’s Statement of Operations. The 
new bottom line is simply called the annual surplus or 
deficit. For the year ended 31 March 2005, both of these 
numbers were positive. The surplus for the year was $242.2 
million and the net debt reduced by $131.5 million.

1.26	For the year ended 31 March 2006, the numbers were again 
positive. The surplus for the year was $243.6 million, and net debt 
reduced by $122.6 million. (The 31 March 2005 reduction in net debt 
was restated from $131.5 million to $145.3 million as a consequence 
of an accounting change.)

1.27	The change in net debt is an important measure of the 
Province’s results for the year, just as important as the surplus or 
deficit for the year. In the financial statements for the years ended 31 
March 2005 and 31 March 2006, and in the 2005-2006 budget 
documents, both indicators were given equal attention. 

1.28	However, in the 2006-2007 Budget and Main Estimates, the 
focus shifted to the budgeted surplus, and it takes some work to find 
the budgeted increase in net debt of $87.0 million. 

1.29	The statement of surplus or deficit included in the budget plan 
attached to the 2005-2006 budget speech included a line that showed 
the budgeted decrease in net debt. It also included a statement of net 
debt that reported the budgeted decrease in net debt. The 2006-2007 
budget speech did not report the budgeted increase in net debt in any 
of the statements attached to it. The only reference to the budgeted 
increase in net debt in the 2006-2007 budget documents is contained 
on page 15 of the Main Estimates.

1.30	In my opinion, the government should give equal attention to 
both the surplus or deficit for the year and the increase or decrease in 
net debt for the year. One of these indicators should not be de-
emphasized when it does not reflect an improvement.

Net debt and the 
Fiscal Responsibility 
and Balanced Budget 
Act

1.31	In my opinion, net debt is important. It needs to be managed. I 
was therefore disappointed when the new Fiscal Responsibility and 
Balanced Budget Act did not include a target for net debt. In fact, 
even if the government achieves all of the targets included in this 
legislation, the Province’s net debt could grow. 

1.32	For example, the Act sets out the objective that the total 
amount of expenses for the period not exceed the total amount of 
revenue. Since net debt changes by the difference between revenue 
and expenditures, not revenue and expenses, and since the amount of 
expenses can be significantly different than the amount of 
expenditures because of capital asset acquisitions,the government 
can produce a balanced budget while net debt is increasing. 

1.33	The Act also includes an objective to reduce the ratio of net 
debt to Gross Domestic Product (GDP) over the period. Again, this 
can be achieved even while net debt increases. Volume 1 of the 
Province’s 2006 Public Accounts includes the following information:



1.34	If net debt at 31 March 2006 had been $7,400 million rather 
than $6,655.7 million, that is if net debt had increased by about $740 
million rather than decreased by about $270 million, the net debt to 
GDP ratio would still not have exceeded the 31 March 2004 
percentage.

1.35	So, my concern is that the new legislation about fiscal 
responsibility includes the easy targets but does not address the 
harder issue of managing the absolute amount of net debt. 

1.36	The government of the day made a decision not to include any 
specific net debt targets in the new legislation. In my opinion, the 
government should make sure there is a plan to manage the amount 
of net debt even though it is not set out in the Act.

Appointment of Grant 
Thornton

1.37	The new government contracted with “the independent 
accounting firm Grant Thornton to conduct a review of the financial 
situation of the Province.” The government stated in its 11 October 
2006 press release that:

The accounting firm will be asked to review, comment and 
make recommendations on such items as the anticipated 
current year financial results, future financial obligations 
already committed to, financial challenges in the health care 
system and the funding status of pension plans.

1.38	I believe that this is an appropriate course of action for a new 
government, and I have full confidence in the ability and 
professionalism of Grant Thornton. However, I am concerned that 
this review has been called an independent audit in multiple media 
stories, including in quotes attributed to members of the government. 

1.39	As the press release clearly states, Grant Thornton is acting as 
a consultant to government to look at a number of specific issues. It 
is not conducting an audit of the Province.

1.40	Under the Auditor General Act, the Auditor General is 
appointed the auditor of the Province’s financial statements. I am 
required to report to the Legislative Assembly, not to any member of 
government, which, coupled with my professional responsibilities as 
a chartered accountant, means that the work of the Office must be 
conducted in an independent and objective manner.

1.41	The independence provided to us under our Act is what 
fundamentally sets us apart from government and allows us to fulfill 
our duties.

1.42	When media reports refer to the government bringing in 
Grant Thornton to perform an independent audit, I, as well as staff in 
the Office of the Auditor General, become concerned that this 
diminishes the work we do.

1.43	It is important to me that government makes it very clear to 
the media, and in their comments to the media, that Grant Thornton is 
not conducting an audit. And that while Grant Thornton is an 
independent accounting firm, the Office of the Auditor General 
comprises the group of independent auditors who are responsible to 
annually audit the Province’s financial statements. 

Acknowledgements

1.44	I want to acknowledge the cooperation that we receive from 
government departments and agencies during the course of our 
financial audit work; they are universally helpful to us. Specifically 
the cooperation we get from the Office of the Comptroller is critical 
to our work. 

1.45	I want to thank all of the staff of the Office of the Auditor 
General for their fine work during my first full year in the position, 
and specifically Mr. Ken Robinson, C.A. for taking responsibility for 
the audit of the Province’s financial statements, and the everyday 
operations of our Office.



Michael Ferguson, CA

Auditor General